Wednesday, July 30, 2008

Forex Market Turmoil

My recent excellent trading week was followed by a less than stellar week. Basically, I was caught by surprise when the US markets, and hence the US dollar, started to make a comeback.

I've been cutting my teeth in the forex market for over a year now, but this entire period has been associated with a weakening US dollar. The market mechanics seem to be changing around -- so I'm finding it more difficult to trade. Currencies aren't bouncing off their bollinger boundaries anymore and instead are trading flat for extended periods of time.

There's no good indication of future expections coming out of a flat line. Plenty of indicators, such as stochastics, become worthless when they are operating on moves of only a few pips. They are no longer able to predict entry points that are very likely to coincide with meaningful price moves.

In light of all this, I've swapped much of my capital into my low risk carry trading account.

I'm learning, slowly, that it's all about preservation of capital. In uncertain times hunker down and protect what you have. When things start to operate according to your plan you can then bring out the big guns and start working within those more favorable conditions.

Don't try to force the market to give you money. If it's acting counter to what you are used to then it's time to regroup and figure out what is going on. For example, if the US markets start to show signs of an underlying economic recovery, we'll be able to expect US interest rates to rise. We could be in for several years of US dollar recovery while the Eurozone, which hasn't swallowed as much medicine, may still have to work out some issues.

Obviously, I'm not certain on the timing, but when the market participants who exited the dollar return to it, you don't want to be on the wrong side of that trade.

Friday, July 18, 2008

Friday Forex Recap

This has by far been my best trading week...

I might have made more in the past but it was admittedly just hit and miss combined with patience. This last week I've been following technical indicators and doing more than just hope for the best at Bollinger boundaries.

Sunday PM through Monday PM -- NAV +3.05%
Tuesday AM through Tuesday PM -- NAV +2.93%
Wednesday AM through Wednesday PM -- NAV +8.2%
Thursday AM through Thursday PM -- NAV +3.9%
Friday AM through Friday PM -- NAV +1.1%

During the business day I've been able to take positions for hours at a time and generally end up ahead. In the evenings the market seems to slow down, but I am now generally able to scalp out dollars using the 1m and 5m in concert.

Additionally, when I am behind in a day trade or a scalping position I am often able to spot a good reversal point and take advantage of that with a second position. Doing this a few times can earn back the losses on the original trade -- assuming it still appears to be a good idea to hold onto it.

Some things I've realized this week:

  • I now understand what people mean when they talk about not trading on Sunday or Friday. Now that I can begin to get a feel for the market I noticed that movement and opportunity were lacklustre during these periods.

  • I can scalp! This is awesome. It's powerful to be able to scratch pips out of the markets whether they are rising or falling. It's nice to know I can do this if I have a position I want to hold but that is making me nervous as it accumulates a loss before the expected move.

  • I don't know if these results will now be typical for me or not, but I do finally understand that it isn't impossible to work the markets and earn money.

  • As well, I understand that I don't want to be trading around news events. If I'm carefully looking for technical setups, the last thing I want is some huge sudden movement due to news. Not only will this potentially catch me on the wrong side of a trade, but it may throw off my ability to analyze things for a while
I should note that my net asset value increases are not compounded. I do skim off most of the gains and push them into a much less risky sub-account. I have no idea whether or not I can trade with the same style when the numbers get bigger. The psychology of seeing larger losses mounting, or higher gains accrue, may throw off my style and keep me from making any money.

Thursday, July 17, 2008

Thursday's Forex Results: NAV +3.9%

Believe it or not I'm not enthused about today's earnings.

They just didn't seem to be coming naturally. I don't know how to explain it. The markets have been ranging for the last couple of days so maybe that is what's wrong. I actually closed all open trades a few times today -- just so that I could get out of the market and not be exposed to any risk.

Maybe I'm just tired?

Anyway, I expect tomorrow to be less than stellar as well. The markets seem to get jittery on Friday... with many players trying to get out of the market prior to the non-trading weekend. However, with the recent ranging, maybe the market will make some sudden moves or something.

Wednesday Forex Gains: NAV +8.2%

Like the title said, today was a great day!

A short morning session yielded two or three percent. The rest of the day went very slowly, but I was able to wrestle pips out of the market again and again.

Basically, I'm watching charts very closely, looking for setups. I've got some work to do to improve my timing, but in general I seem to have a good collection of indicators that keep me from getting into trouble very often.

When a setup happens, I drop in a position. Generally, I'll switch from currency to currency, on the 1h, looking for things I am fairly confident will move in a way I can predict. Once I have those, I may check the 5m, looking for the same indications, as a means of entry timing.

What seems to happen is that sometimes I'll be right, and sometimes I'll be wrong. The positions that go well end up hitting take profits. At that point, because they are reasonably well chosen, the market will often reverse and give me an opportunity to exit from the positions that weren't previously winners.

Anyway, the real key, at least for me, is having a series of indicators that give you a very high probability of being able to make a prediction. Unfortunately, I'm not willing to get very precise and tell you my setup. Though people often say that it makes no difference how many people know something, it does. If everyone knows the same thing -- then some people will anticipate that thing and in doing so change the price dynamics.

Tuesday, July 15, 2008

Day Trading and Scalping

Things are still going very well, but I have to admit I haven't been able to pick off huge gains this week. Not yet anyway.

Here's the scoop...

Sunday PM through Monday PM -- NAV +3.05%
Tuesday AM though Tuesday PM -- NAV +2.93%

This is okay, but I see large profits left on the table. It's strange, in order to make it easier to pick up pips I'm working on the 1M and 5M charts. This is pretty good for watching movement -- feeling the rhythm of market -- but it sucks for keeping in mind the larger picture. I can certainly see why people invest in trading stations with multiple large monitors.

Anyhow, to be clear, while the net asset value can be determined via unrealized profits and losses, I am closing all open trades at the end of each session. These are true, risk free at the time of reporting, NAV numbers.

I can't help but wonder if it would be easier to scalp and/or trade profitably if I was able to focus on this during business hours. Well, it would probably be easier to catch movement during the European session too. Things seem to get pretty quiet at times during the Asian session.

Finally, since I have a very high win percentage on scalp trades I am thinking of increasing the size of these trades. Would the psychology of risk start getting in the way if I did that? Probably. If not, it wouldn't be very hard to turn up the income quite a bit -- and I always assume that if things were that easy everyone would do it.

We'll see.

Friday, July 11, 2008

Trading Week Recap

It's been a great week.

I've been able to apply a new strategy dealing with negatively correlated pairs and I've also been able to put together a couple of reasonably successful days by working to curb my greed and waiting for appropriate entry times based on my signals.

How successful were these last couple of days?

Yesterday I increased the NAV on my high risk account by ~5.6 percent. Today I blasted out a very nice ~7.3 percent. Holy crap! This makes two days in a row that I've taken a good portion of my earnings and transferred them into a long term low-risk carry trading account.

You may be wondering why I do that. Well, it's very likely, perhaps probable, that I'll eventually blow up my high risk account. So, when it's profitable, I move my earnings to a safe place so I can continue to risk an amount I'm comfortable with. Obviously, I want to earn and protect more than the entire NAV of my account before eventually blowing it up. Then it will be time to learn from my mistakes, re-fund the account, and try again.

So, the method to my madness is that it's a lot more fun, or exciting, to participate in high risk big return speculation. As I get better at this I am able to generate a net overall positive return -- which I then put to work in long term carry positions at very low risk. This means I get to have fun every day, mixed with some hair loss on tough days, as well as building a slowly increasing carry trade income.

In the long term, this might work out well.

Overcoming Greed

No, I'm not here to tell you that I've overcome greed.

However, I can tell you how damaging it is to let greed get involved in your decision making process. Generally, it works like this:

  • You see a pair moving in a direction, let's say up, and you want aboard before the big move.

  • You grab a piece of this pair right then, so you won't be left behind.

  • You look at your charts and see that you've bought at the top of a bollinger band in one timeframe or another.

  • You spend untold hours having the price come close to your original purchase price but of course it never gets above your purchase price to any degree.

  • After biting your nails for hours you finally dump the pair as soon as you can get a few measly pips out of it.
Sound familiar? Here's me being an idiot...

Bad entry point

The really annoying thing that occurs to you, again and again, in the above scenario, is that if you had waited until the price fell a dozen pips or more you'd have been able to make five or six reasonably profitable trades instead of sitting on a turkey.

While bollinger bands are not a panacea they can be a great tool. If you buy close to a short-term low on your chart you are much more likely to be able to sit on your trade and wait for a good move. This is because your trade may never sink far enough under water to cause you stress.

Yes, yes, I know. We should always have stops on when we make our purchases. However, that doesn't mean that we won't want to babysit our trades so that we can be there to grab another trade if the opportunity strikes.

Once again, an opportunity for you to learn from my mistakes...

Wednesday, July 9, 2008

Forex Fun and Profit with Correlations

What is the first thing that comes to mind when you think of Forex trading? I'm willing to bet that it isn't fun.

Well, recently I've been enjoying trading a little more than usual.

While doing a bit of reading I found a link talking about currency correlations. Go take a look at the charts provided (scroll down a bit). Notice anything? Generally, when a currency pair you are holding rises or falls, there is another currency pair that is moving in a different direction.

I know, this shouldn't be a revelation to anyone, should it?

However, if you open positions in two currencies that have a high negative correlation you will often see one of them being profitable in the near term. Then, if you are careful, you can pick good moments to close and reopen your offsetting positions. Furthermore, if you generally participate in carry trades, as I do, you'll have an ability to enter more positions with less variability in your drawdown.

Of course, don't get me wrong, this does entail a higher level of risk. At the very least you must be aware that a correlation present now may suddenly disappear or reverse at any time. Alternately, once you open or close a trade at what appears to be an opportune moment, the market may move unexpectedly while you don't have an offsetting currency pair. This is nothing new, but if you are trading a higher percentage of your NAV you will be exposed to higher risks.

Personally, I use an account with a small relative balance for this type of trading. When I am making profits I siphon much of them out into an account that is not exposed to such a high level of risk. As a bonus, highs and lows demonstrated in the correlations account indicate good entry points in my less risky accounts.

So, where's the fun? The fun is in seeing profitable positions a majority of the time. It's in having just about any move, and it's reversal, present an opportunity to you in one currency or another. The long periods of waiting and boredom are reduced. All you have to do is be willing to accept some risk on an account set up for this purpose.

Addendum: In the last 12 hours the NAV on my high risk account increased by 5.66%! Now that's fun. I've closed all open trades as it's time to start the work day...

Saturday, July 5, 2008

Weekend Forex Intermission

Though my wife is happy that there isn't any Forex trading during the weekends I certainly wish there was. I enjoy trading but generally don't have that much opportunity to do so during the work week... and I'm anything but a full time professional.

So, the past week was fairly successful. Thanks to the recovery in the AUD carry trades I managed to catch a nice downturn in the EURAUD. I did have to withstand some nail biting as it went against my prediction for a few days before eventually succumbing to my will. Alternately, maybe I was just lucky to catch some news going my way. Either way, I'll take it.

Now that the summer vacations and visits are mostly over, already, it will be time to start putting little bits of capital into the market on a regular basis. It seems to make it much easier to earn if you always have a bit more capital to play with.